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Log Market and Ocean Freight - September 2010

Export Log Market

Last month we reported that in mid August we were getting strong signals that CFR prices had stabilised in China at USD120/JAS m³. We are pleased to further report that August was in fact a trough from a decline in price that commenced in April of this year. Prices have lifted in September to around CFR USD125/JAS m³ for early September shipments and are expected to lift to USD130 for late September shipments. At-wharf-gate NZD prices in turn lifted by NZD3-8/JAS m³ for A grade. Export pruned grades had the largest increase at NZD7-9/JAS m³.

At the lower price level of CFR USD120/JAS m³, NZ Pine is very competitively priced compared to Russian logs/lumber, North American logs/lumber and domestic logs. In contrast, NZ Pine reached as high as CFR USD152/JAS m³ in April, and it became too expensive in the price-sensitive China timber market.

The other main drivers of this market improvement are lower than expected volumes of Russian logs entering the Northern China and Shanghai markets and an earlier than expected seasonal recovery. Inventories of all logs, including NZ Pine logs, which were persistently high through to early August, are now declining steadily.

Despite being the world's second largest and fastest growing lumber producer (slightly ahead of Canada in 2009), China is also now the world's second largest importer of lumber (after the U.S.). Lumber imports to China doubled from 2000 to 2007 and are expected to double again by 2012 with an average annual increase in lumber consumption of 5.1 million m³. Currently Canada is rapidly gaining market share in China on the back of low pricing (driven by the worst US demand and prices in decades) and large volumes produced from salvage of the B.C. mountain pine beetle-killed forests (See Wood Matters Issue 18, Log and Ocean Freight Market). These drivers are expected to change in the future when more solid growth returns to the US property and construction market, and the beetle-kill salvage programme comes to an end.

The big challenge of NZ Inc is to establish a sustainable NZ Pine price that provides decent returns to forest owners but does not make our pine uncompetitive and lead to high volatility in demand and price. It is the high volatility that is destructive to the health and viability of the NZ forestry sector. (See Wood Matters Issue 19, Commentary: Why is Volatility Damaging for the Forestry Sector?.

India has bucked the trend in September with high log inventories and weaker prices. This is expected to be short-lived, however, as prices will ultimately have to be competitive with China to attract continued supply. India is now New Zealand's third largest log market at just over 1 million m³ per annum and is expected to overtake Korea (at second place with 2.5 million m³ per annum) within the next 3-5 years.

Japanese and Korean demand is expected to remain flat with Korea still dealing with its past building boom and Japan failing to find solutions for well over a decade of lack-lustre growth. However, prices to these markets will also have to be at par to China to continue supply, albeit at steady volume levels.

Domestic Log Market

Domestic demand for logs has been steady with some switching from export cuts to domestic cuts for the cross-over grades, as export log prices hit their August lows.

September is the last month of the third quarter and during this month negotiations will progress for settling fourth quarter prices. The lift in export prices in September will help support domestic log pricing.

Reports from our Christchurch office indicate that local log processors haven't been affected too badly by the recent earthquake and despite one or two short closures, mills are operating again. After the initial clean-up, disruption and short-term loss of earnings for many individuals and businesses, the region and New Zealand overall should benefit economically from the reconstruction of homes, commercial buildings and infrastructure. This reconstruction should include strong demand for wood products and possibly higher rates of wooden construction as wood's superior earthquake resistance qualities are identified. Most of the money for the reconstruction will come from insurance claims and the government.

This increased activity comes a time when there is spare capacity in the building sector (see chart below).

Source: BNZ Markets Outlook, Sep 2010

Ocean Freight

Ocean freight costs have again unexpectedly risen since last month and there is a huge range in price of fixtures. September is proving a difficult time for those at the short end of the spot market. The range in freight rates is currently wide from mid USD 40s to mid 50s per JAS m³.

August ended with the Baltic Dry Index (BDI) was just below 2,713, an increase of 35% in two months.

As contemplated last month, Russia has put a limit on grain exports from the 15th August until 31st Dec 2010. Exports for 2010 will be limited to 65 million tonnes (compared to 97 million for 2009). This significant volume reduction will have to be made up from elsewhere, and "elsewhere" is more distant from markets and means more km-tonnes and a greater demand for shipping.

Shipping heavily depends on the well-being of the developing world as this is where the big km-tonne driver is. So despite low estimates for growth in developed economies such as the US (2.4%), Germany (2.2%), the Eurozone (1%) and Japan (4%), forecasts for growth in major Asian developing countries are strong. For example the Philippines (5.4%), Indonesia (6.2%), India (8.4%), Malaysia (8.9%), Vietnam (6.4%), Thailand (10.5%), Taiwan (11%), Korea (7.5%) and China (10.3%). This is driving the bullish sentiment and pricing for shipping.

The Baltic Handymax index ended August at 1,077, a 7% rise in a month.

As we have mentioned before in this section, one of the reasons we expect Handy vessels to have limited downside in freight rates, is the relatively old age of the global fleet. (See Wood Matters Issue 18, Headwinds for the Handy-size Market). Older vessels are much more likely to be scrapped as the cost of marine surveys, maintenance and lower efficiencies (compared to new vessels) make the cost of ownership too high. The interesting thing is, however, the rate of scrapping has little to do with the scrap price. Prior to the global financial crisis, scrap prices were at all time highs – based on high steel prices – but scrapping rates relatively low. This was because ocean freight rates were also very high and it was worth keeping even old clunkers as sea. Conversely, as scrap prices plummeted, scrapping rates have soared. This is based on much lower ocean freight rates. The impact of the scrapping, however, is removing capacity from the global fleet which puts upward pressure on rates. See chart below.

Source: N. Cotzias Shipping Group

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 135  
Structural (S30) 101  
Structural (S20) 86  
Export A   95
Export K   88
Export KI   82
Pulp 52  

Note: Actual prices will vary according to regional supply/demand balances, varying cost structures and grade variation. These prices should be used as a guide only.

Outlook

If ocean freight and foreign exchange remain steady, the forecast increases in CFR price are expected to continue to result in increases in NZD at-wharf-gate prices in New Zealand for export logs. Domestic log prices changes will vary regionally, but overall the average change is expected to be small.